The Investment Column: Fyffes bruised by cautious handling

According to Fyffes's management, the Dublin-based fruit group has been unfairly treated by the stock market. They think its reputation and valuation has suffered because of the problems at Geest, whose banana business Fyffes acquired in a pounds 147m deal last year.

Prior to the deal, Geest's record had been damaged by a series of natural disasters such as hurricanes and disease which seemed to wreck the group's crops on an almost annual basis.

By contrast, Fyffes claims its fruit and vegetable business has been well managed, with balance coming from its wide product range which includes apples, citrus fruit and potatoes as well as bananas. The group has also been careful to develop a wide source of supply, buying in crops not just from the Caribbean but South America and Europe too. Bananas now account for only 30 per cent of sales.

Even so, the market has chosen to treat the stock with caution. Along with other former go-go fruit distribution companies of the 1980s such as Albert Fisher Fyffes has found itself derated.

As a result, the shares have been a dull performer, moving in a very narrow range around 100p for the past three years, although they managed a 5p rise yesterday to 115p.

During this period Fyffes has used an aggressive acquisitions strategy to drive sales higher. From pounds 623m in 1993, group turnover has risen to pounds 1.4bn last year.

But that growth has not been reflected at the profits line. Yesterday's full-year figures showed that in the year to October pre-tax profits were up from pounds 42m to pounds 46.5m but profits from continuing operations fell. There was a IRpounds 1m loss in the US again and that business has now been terminated. The group margin edged up from 3.2 per cent to 3.3 per cent.

Fyffes may be able to run the Geest business better than Geest itself. But by deciding to run it as a standalone operation to satisfy supermarket concerns of market dominance it has substituted customer satisfaction for the scope to wring out synergy gains from the deal. Fyffes and Geest still operate their own sales forces and have their own head offices.

Elsewhere, there has been investment in expanding the Dublin distribution centre and the construction of a new centre at Basingstoke. After capital investment of IRpounds 22m last year, the figure should fall to IRpounds 15 this year.

Looking forward, Fyffes is keen to use its pounds 70m cash pile to fund further acquisitions, possibly in northern Europe where it is under-represented. But though this is a solid business with a strong balance sheet, it does not look a particularly appetising investment. On Panmure Gordon's profit estimate of pounds 50m for this year the shares trade on a forward rating of 12. Compared with a prospective growth rate in single figures that is high enough.